When you take a job through a company, the hourly wage or salary may not be the only form of compensation for the position. Some companies offer equity compensation in addition to or in place of some upfront pay. Commonly offered to business administrators and executives, equity compensation consists of stocks and stock bonuses through the company.
How Equity Compensation Pays
When a corporation hires an equity compensation employee, the company still gives the employee a regular paycheck. This paycheck consists of the amount of upfront money that the employer and employee agreed upon during the employment negotiating process as the employee’s base pay. This paycheck does not include, and won’t ever include, any equity compensation that the employer and employee agreed on. Instead, equity compensation generally pays in the form of bonus checks when quarterly stock payouts are made.
Reasons for Paying Equity Compensation
Unlike an employee’s upfront salary, equity compensation is based on performance, but not just on the individual employee’s performance. The compensation is tied to the entire company’s performance, or, more specifically, the equity of a company’s stock, which is equal to the company’s net worth, or the monetary value of the company minus expenses and debts. Since an employee’s earning of equity compensation ties directly to the worth of the company, equity compensation works as an incentive to encourage employees to work toward increasing the company’s net worth for stockholders. In the right environment, it can boost morale and incentivize team members by making them invested in the business's success.
Read More: What Is Unearned Compensation?
Equity Compensation as Pay
An employee of a company may or may not earn “extra” money as a result of equity compensation. In some instances, an employee may receive what is considered a normal salary for his position as upfront pay and equity compensation is simply a bonus. In other instances, an employee may receive a lesser amount of upfront pay than the average pay for his position and earn equity compensation to make up the difference.
Typical Equity Compensation
Since equity compensation relates to the value of a company’s stock, the shareholders in a company generally determine the company’s equity compensation structure. Due to this, equity compensation varies widely from company to company, though it may account for over 30 percent of executive salary packages at large companies. Whatever the equity compensation amount, it is based on employee’s pay and stock worth, so if an employee making a $1,000,000 salary receives a 10 percent equity compensation bonus, it equals approximately $100,000.